Accounting Basics

• Closing the books. After all revenues and expenses are accounted for, any net profit gets posted in the owners' equity account. Revenue and expense accounts are always brought to a zero balance before a new accounting cycle begins.

• Preparing financial statements. At the end of a period, businesses prepare financial reports — income statements, statements of capital, balance sheets, cash-flow statements and other reports — that summarize all of the financial activity for that period.

The Importance of Financial Statements
At the end of a period — either annually or more frequently, depending on the length of a business's accounting cycle — accountants create financial statements that show the financial health (or decline) of a business.

Many people inside and outside a company use the information found in financial statements. Business owners and managers use the data in financial statements to chart the course of their companies, project revenues and expenses, monitor cash flow, keep tabs on costs and plan for the future. Present and prospective employees also want to see their employers' financial performance.